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Earnings Management and The Post-Issue Underperformance in Seasoned Equity Offerings

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Author Info
Ivo Welch
Siew Hong Teoh
T.J. Wong

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Abstract

Ritter and Loughran~(1995a) and Spiess and Affleck-Graves~ (1995) document that firms issuing seasoned equity offerings (SEOs) severely underperform the stock market within five years after the offering. Our paper examines the hypothesis that SEO investors are too optimistic because they naively extrapolate earnings trends without fully adjusting for observable discretionary managerial reporting choices. We find that aggressive firms, which report high pre-SEO earnings at the expense of post-SEO earnings by taking high pre-issue discretionary current accruals, subsequently perform worse in terms of abnormal stock returns and industry-adjusted net income. Aggressive quartile firms earn a highly significant --48% four-year compounded abnormal return; conservative quartile firms earn an insignificant --7% four-year compounded abnormal return. In contrast with the pre-SEO discretionary current accruals, the non- discretionary current accruals and both discretionary and non- discretionary long-term accruals do not predict post-SEO returns reliably.

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Paper provided by University of California at Los Angeles in its series Finance with number 9-95..

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Date of creation: Nov 1995
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Handle: RePEc:wop:callfi:_004

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  1. Jyrki Niskanen, Matti Keloharju, 2000. "Earnings cosmetics in a tax-driven accounting environment: evidence from Finnish public firms," European Accounting Review, Taylor and Francis Journals, vol. 9(3), pages 443-452, September. [Downloadable!] (restricted)
  2. Nittai K. Bergman & Dirk Jenter, 2005. "Employee Sentiment and Stock Option Compensation," NBER Working Papers 11409, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. KENT D. DANIEL & David Hirshleifer & AVANIDHAR SUBRAHMANYAM, 2004. "A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-reactions," Finance 0412006, EconWPA. [Downloadable!]
  4. Pornsit Jiraporn, 2005. "An empirical analysis of corporate takeover defences and earnings management: evidence from the US," Applied Financial Economics, Taylor and Francis Journals, vol. 15(5), pages 293-303, March. [Downloadable!] (restricted)
  5. Jeffrey Gramlich & Ole Sørensen, 2004. "Voluntary management earnings forecasts and discretionary accruals: evidence from Danish IPOs," European Accounting Review, Taylor and Francis Journals, vol. 13(2), pages 235-259, July. [Downloadable!] (restricted)
  6. Maher Kooli & Jean-Marc Suret, 2001. "The Underpricing of Initial Public Offerings: Further Canadian Evidence," CIRANO Working Papers 2001s-50, CIRANO. [Downloadable!]
  7. Delgado, María del Mar & Castrillo Lara, Luis, 2001. "Detecting earnings management in a Spanish context," Documentos de Trabajo "Nuevas Tendencias en Dirección de Empresas". Working Papers "New Trends on Business Administration". 2001-09, Interuniversitary Doctorate Program "New Trends on Business Administration", Universities of Valladolid, Burgos and Salamanca (Spain). Programa de Doctorado Interuniversitario "Nuevas Tendencias en Di. [Downloadable!]
  8. Alon Brav & Christopher Geczy & Paul A. Gompers, . "Is the Abnormal Return Following Equity Issuances Anomalous?," Rodney L. White Center for Financial Research Working Papers 2-99, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
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  9. Chang, Xin & Dasgupta, Sudipto & Hilary, Gilles, 2005. "The Effect of Auditor Choice on Financing Decisions," CEI Working Paper Series 2005-10, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  10. Maher Kooli & Jean-Marc Suret, 2001. "The Aftermarket Performance of Initial Public Offerings in Canada," CIRANO Working Papers 2001s-52, CIRANO. [Downloadable!]
  11. Hirshleifer, David, 2007. "Psychological Bias as a Driver of Financial Regulation," MPRA Paper 5129, University Library of Munich, Germany. [Downloadable!]
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  12. Juan Monterrey Mayoral & Amparo Sánchez-Segura, 2007. "Rotación y dependencia económica de los auditores: sus efectos sobre la calidad del resultado en las compañías cotizadas españolas," Investigaciones Economicas, Fundación SEPI, vol. 31(1), pages 119-159, January. [Downloadable!]
  13. José J. Alcarria Jaime & Belén Gill de Albornoz Noguer, 2004. "Specification and power of cross-sectional abnormal working capital accruals models in the Spanish context," European Accounting Review, Taylor and Francis Journals, vol. 13(1), pages 73-104, May. [Downloadable!] (restricted)
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